Role: Rajat Singh
Request: Provide guidance on company’s financial strategy, assess firm’s overall debt policy
(appropriate mix of debt/equity)
What does the company do: largest printer of paper checks in the US
Retired all of it’s long term debt, haven’t issued major bond in more than 10 years
Company has been pursuing aggressive program of share repurchases
- Stock has been at its highest in 10 years
Dominant player in very concentrated (49%), competitive check-printing industry.
Sales and earnings growth was on a decline – fight against technological change (online payment
methods, popularity of credit and debit cards) by:
- reducing labor force (15K to 7K)
- getting rid of noncore businesses (~20 businesses)
- went from 62 plants to 13
- outsourced IT
- more efficient manufacturing
Need financial flexibility to deal with disintegration of core business. No more share repos. Time
for new debt issue!
1975 – 1995 (peak cheque usage): Revenues grew at compound annual rate of 12%, has declined
Competitors: John Harland (25%) and Clarke American (26%)
Annual decline 1-3% in check demand (expect to continue)
2000: major strategic shift with spinoff of technology-related subsidiaries (provided electronic-
payment to financial and retail industries, tech-related consulting services to financial services
Reposition firm as pure-play check-printing company made sense to investors – stock price rose
in response to news.
Three business units:
- Financial services sold checks to consumers through financial institutions (3-5 year
contracts), 60% of sales
- Direct checks sold to consumers through direct mail and the Internet, 24% of sales
- Business Services sold checks, forms, etc. through financial institutions and directly to
small businesses (no more than 20 employees), 24% of sales
Find the debt levels for each credit rating: Please see Exhibit 1
Assumption: Adjust debt and equity levels so that assets stay the same (since earnings are the
same). Market value of equity was 2665M, now it’s 2528.36M
Using this assumption, and the debt levels, debt to capital was found for each rating.
Then using the debt to capital and the cost of debts and equity (exhibit 3), WACC was found.
WACC is lowest for BBB credit rating.
This means that the company would be able to take on more projects with a positive NPV.
Exhibit 1: AAA AA A BBB BB B